In the Courts

July 31, 2015

“Suit” Includes EPA’s CERCLA Enforcement Proceedings, Texas Supreme Court Holds

In response to a question certified to it by the U.S. Court of Appeals for the Fifth Circuit, the Texas Supreme Court has ruled that the term “suit” in a general liability insurance policy included superfund cleanup proceedings conducted by the Environmental Protection Agency (“EPA”) under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”).

The Case

Decades ago, McGinnes Industrial Waste Corporation allegedly dumped pulp and paper mill waste sludge into disposal pits near the San Jacinto River in Pasadena, Texas. In 2005, the EPA began investigating possible environmental contamination at the site. In November 2007, the EPA served a general notice letter on McGinnes’ parent company stating that it was a “potentially responsible party” (“PRP”) under CERCLA and offering it “the opportunity to enter into negotiations” concerning cleaning up the site and reimbursing the EPA for costs it had incurred.

In December 2008, the EPA served a similar letter on McGinnes. That letter included 58 requests for detailed information covering McGinnes’ alleged involvement with the site. The letter noted that a failure to respond could result in penalties of up to $32,500 a day.

In July 2009, the EPA sent McGinnes a special notice letter stating that it had determined that McGinnes was responsible for cleaning up the site and demanding that McGinnes pay $378,863.61 in costs. The letter required McGinnes to make a good faith offer to settle with the EPA within 60 days.

When McGinnes did not make an offer, the EPA issued a unilateral administrative order directing McGinnes to conduct a “remedial investigation and feasibility study” in accordance with the EPA’s specifications. The letter warned McGinnes that its willful failure to comply without cause would subject it to $37,500 per day in civil penalties and punitive damages up to three times the resulting costs to the EPA.

During the time McGinnes allegedly was dumping waste at the site in the late 1960s and early 1970s, it was covered by what then were known as standard-form comprehensive general liability (“CGL”) insurance policies issued by Phoenix Insurance Company and Travelers Indemnity Company. In May 2008, in between the EPA’s first two notice letters, McGinnes requested a defense in the EPA proceedings from the insurers. The insurers refused on the ground that the proceedings were not a “suit” under the policies.

McGinnes sued the insurers in federal district court for a declaration that the policies obligated them to defend it in connection with the EPA’s CERCLA proceedings. The district court granted the insurers’ motion for partial summary judgment on the duty-to-defend issue and certified its order for interlocutory appeal.

The U.S. Court of Appeals for the Fifth Circuit certified the following question to the Texas Supreme Court:

Whether the EPA’s PRP letters and/or unilateral administrative order, issued pursuant to CERCLA, constitute a “suit” within the meaning of the CGL policies, triggering the duty to defend.

The Texas Supreme Court’s Decision

The Texas Supreme Court ruled that although the word “suit” commonly referred to a proceeding in court, it also included CERCLA enforcement proceedings by the EPA.

The court reasoned that the PRP notice letters served as pleadings. It pointed out that the EPA obtained discovery through requests for information, “indistinguishable from interrogatories under the rules of civil procedure” and that the EPA engaged in mediation through its “invitations to settle.” In the court’s view, a unilateral administrative order resembled summary judgment, and the fines and penalties for willful non-cooperation in the process were “like sanctions in a court proceeding, only prescribed by statute.”

Simply put, the court found, EPA proceedings under CERLCA were “the suit itself, only conducted outside a courtroom.” The court stated that CERCLA “effectively redefined a ‘suit’ on cleanup claims to mean proceedings conducted by one of the parties, the EPA, followed by an enforcement action in court, if necessary.” In the court’s view, McGinnes’ rights under its policies “should not be emasculated by the enactment of a statute intended not to affect insurance, but to streamline the EPA’s ability to clean up pollution.”

The court made it clear that a “simple demand letter” threatening or prefacing a lawsuit was “nothing like a PRP letter or unilateral administrative order.”  EPA enforcement proceedings, the court concluded, were “unusual.”

The case is McGinnes Industrial Maintenance Corp. v. Phoenix Ins. Co., No. 14-0465 (Tex. June 26, 2015).

Rivkin Comment

It should be noted that 13 out of 16 state high courts to have considered the issue have reached the same conclusion as the Texas Supreme Court: Alabama, Colorado, Connecticut, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Vermont, and Wisconsin. High courts in California, Illinois, and Maine have reached the opposite result.

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